Microsoft and Nokia: The fallout of a calamitous collision

When authors of business studies books come to write up the story of Microsoft’s relationship with Nokia it will be filed in the ‘how not to’ section alongside other classics of the genre like Ford’s development of the Edsel car. In a hole, Microsoft has continued to dig. And dig. And dig. And dig. The news that it is to make a huge write-off and effectively take a step back from competing head-to-head with rivals in phones is the culmination of a dysfunctional relationship that should never have commenced or should certainly have been terminated some time ago.

It didn’t have to be this way. People forget that Microsoft once had a significant share of the mobile phone market but its attempt to hit back at the iPhone and Android has turned into a disaster. This is in part because rather than targeting a specific share of the market it sought to duke it out head-to-head with more capable rivals.

Nokia was once called ‘the Finnish Microsoft’. Not long ago it had the kind of dominance in mobile phones that Microsoft had (and largely still has) in desktop operating systems and productivity applications. But it was crushed by superior products and perhaps a tendency to over-engineer. Microsoft, accustomed to leading most markets it entered and having a chilling effect on the opposition wanted to make a bold statement in mobile so it threw money at Windows Phone and got into bed with a company renowned for its hardware prowess. There seemed an element of hubris to the plan at the time and so it proved.

This wasn’t just a ‘Software + Hardware = Success’ equation. In Stephen Elop Nokia had a CEO who knew Microsoft backwards and might one day have led his former company had he stayed at Redmond. Former Microsoft CEO Steve Ballmer and Elop together gambled that the world needed a ‘third ecosystem’ outside iOS and Android. An axis power made a certain amount of sense if the pair could execute on their project but it was never proven that developers, carriers, retailers or buyers wanted another choice.

Nokia’s Lumia phones were turned around fast and they were good, featuring a slick OS, but lack of software support hurt it badly. Apps that became instant hits on the two main platforms took an age to arrive on Windows Phone and even then they were often not optimised and upgraded on an irregular basis. Windows, the franchise that dominated PCs was relegated to a niche in phones.

There were also amazing wrong-headed decisions, most notably the famous leaked email to staff in which Elop lamented the “burning platform” that was Symbian. He was probably right that Symbian had to go but by making such a broadcast announcement he wrote off sales of cash-cow products and alienated others.

When Microsoft acquired Nokia last year it appeared a desperate move and so it has proven. The $7.6bn write-off equates to about half a billion dollars per month since the deal went through and, with other changes to mapping and advertising strategies, 7,800 jobs will go. An additional $850m will be absorbed in restructuring the phone business.

The news was delivered to Microsoft staff in an email from CEO Satya Nadella where he emphasised a desire to invest “in areas where we have differentiation and potential for growth”. You get the strong sense that Microsoft’s Nokia moves would never have been taken by Nadella. Microsoft used to crush others with the sheer power of its ecosystem, even sometimes when its products were not the best, but this time it was outsmarted. As with search and advertising it couldn’t resist the temptation to compete for market leadership but in the end it was roundly beaten. And so ends the ill-starred romance between these two companies.